On Monday, January 17, 2011, Jim Flaherty, Minister of Finance along with Christian Paradis, Minister of Natural Resources announced new mortgage rules aimed at reducing some of the risk in the Canadian mortgage market after mounting concerns over rising consumer debt levels in Canada.
“Canada’s well-regulated housing sector has been an important strength that allowed us to avoid the mistakes of other countries and helped protect us from the worst of the recent global recession,” said Minister Flaherty.
With household debt in Canada reaching a record 148% of disposable income in third quarter of 2010, exceeding the US level of 147%. The government wants to ensure there is no US style mortgage meltdown in Canada as interest rates are anticipated to rise in 2011.
The rules are aimed at promoting responsible lending and borrowing in Canada while encouraging people to increase their home equity.
Three new mortgage rules were announced including:
Reduce the maximum amortization period to 30 years from 35 years for new government-backed insured mortgages with loan-to-value ratios of more than 80%.
Effective March 18, 2011
This will significantly reduce the total interest payments Canadian families make on their mortgages, allow Canadian families to build up equity in their homes more quickly, and help Canadians pay off their mortgages before they retire.
Lower the maximum amount Canadians can borrow in refinancing their mortgages to 85% from 90% of the value of their homes.
Effective March 18, 2011
This will promote saving through home ownership and limit the repackaging of consumer debt into mortgages guaranteed by taxpayers.
Withdraw government insurance backing on lines of credit secured by homes, such as home equity lines of credit, or HELOCs.
Effective April 18, 2011
This will ensure that risks associated with consumer debt products used to borrow funds unrelated to house purchases are managed by the financial institutions and not borne by taxpayers.
“The prudent measures announced today build on that advantage by encouraging hard-working Canadian families to save by investing in their homes and future,” added Flaherty.
“The economy continues to be our Government’s top priority,” continued Minister Paradis. “Our Government will continue to take the necessary actions to ensure stability and economic certainty in Canada’s housing market.”
This move is widely viewed as a measure to influence the Canadian mortgage market and Canadians debt levels without resorting to interest rate hikes. It gives the Bank of Canada and Mark Carney much more flexibility and allows him to keep Canadian interest rates low thereby putting less pressure on the overall Canadian economy.
The government is implementing a policy that will affect a subset of borrowers instead of the entire economy.
The 2011 Mortgage Changes in Detail:
1) Change Maximum Amortization Period to 30 YEARS:
A typical mortgage in Canada will have a term of five years or less at which time it can be renewed with a specific amortization period in which the entire mortgage must be paid off.
The new rules which come in effect on March 18, 2011 (only applies to mortgages with less than a 20% down payment) will reduce the maximum amortization period from 35 years to 30 years resulting in a moderate increase in the monthly payment along with a significant reduction in the total interest paid over the amortization period.
A typical $300,000 mortgage with a 5% interest rate will see monthly payments increase by $97.00 per month from $1,504 (35 year amortization) to $1,601 (30 year amortization) and result in a total $55,404 interest savings over the life of the mortgage.
2) Lower Maximum Refinancing To 85% Loan-to-Value Ratio:
Canadian borrowers can refinance their mortgages to increase the amount of the loan secured against their home.
The new rules which come in effect on March 18, 2011 will reduce the limit on refinancing from 90% to 85% of the value of the home. As refinancing a mortgage usually lowers the borrower’s equity in their home, reducing the maximum loan-to-value ratio on refinancing will encourage Canadians to keep more equity in their home.
A typical home valued at $300,000 will allow a homeowner to access up to $255,000 at the new 85% loan-to-value ratio, while previously they would have been able to get up to $270,000 at the 90% rate. The changes will increase the remaining home equity by an additional $15,000.
3) Withdraw Government Insurance on Non-Amortizing Lines of Credit Secured by Homes:
Currently a line of credit secured by the borrower’s home, such as a home equity line of credit, is limited to a maximum of 80% of the value of the home.
There has been a substantial increase in the credit available to Canadians through this type of secured line of credit over the past several years, and it is an important factor in the rise in overall household debt. These loans are generally non-amortizing, which means that borrowers are not required to make regular payments on the principal amount of the loan.
Moreover, these loans are almost exclusively variable rate products, which expose borrowers to the impact of rising interest rates.
While regulated lenders are not required to obtain insurance on lines of credit secured by homes at the time of origination, they may choose to obtain insurance after origination through what is known as “portfolio insurance,” where secured lines of credit are pooled into a portfolio and then insured by a mortgage insurer. At the time of insurance, the benefit of the portfolio insurance is to the lender by facilitating funding, rather than to the individual borrower. Other options exist for lenders to fund their secured lines of credit.
Many lenders now offer multiple loans or a multi-segment loan secured against a borrower’s home. If a loan or a segment of a multi-segment loan is in the form of a revolving line of credit that does not amortize over time, it will no longer be eligible for government-backed insurance. However, with established scheduled principal and interest payments, a loan will continue to be eligible for government-backed insurance, provided it meets the underwriting standards set by the mortgage insurer.
Withdrawing government insurance backing on these non-amortizing products is consistent with the Government’s objective of supporting the long-term stability of Canada’s housing market.
As our business grows, number of clients had asked us to expand our services to further than GTA; As a result of your recognition of our hard work and dedication, we are proud to announce that as of December 1st we are offering full Real Estate service to entire Guelph Region.
If you were happy with service of your Realtor in GTA and would like to receive the same service in search for home or investment in Guelph region, why go through stress of selecting Realtors that you have no record with ?
Whether you are searching for retirement or investment property, job relocation, or simply looking to find your next home, Team Spanovic already has good track record with successful transactions in Guelph and will be happy to offer team effort in servicing your needs with same dedication as we are in GTA.
Residential property sales recorded through the MLS® System of the Mississauga Real Estate Board were down noticeably in July 2010 from record levels for the same month last year. A slowdown of activity in the second half of 2010 has been widely expected as a result of accelerated home purchases earlier this year.
Home sales numbered 864 units in July 2010, down 34 per cent from the highest July on record in 2009. On a year-to-date basis, however, sales activity remains 14 per cent above levels reported over the same period in 2009.
New supply is adjusting to lower demand. New residential listings numbered 1,361 units in July 2010, down eight per cent from the same month last year. On a seasonally adjusted basis, new listings were down for the fourth consecutive month, and this is helping to maintain a healthy balance of supply and demand in the marketplace.
“The introduction of the HST was the last in a string of temporary factors that have resulted in considerable volatility in the market over the past two years, including the pull forward of demand earlier this year which resulted in record-setting activity levels just a few months ago,” said David Cobban, President of the Mississauga Real Estate Board. “With these factors now largely in the rear-view mirror, buyers and sellers can look forward to a more stable market as demand comes back into line with economic fundamentals.”
The average price of homes sold in July was up six per cent from year-ago levels to $393,394.
The total value of all residential sales was $339.9 million in July 2010, a decrease of 30 per cent from year-ago levels.
Active residential listings on the Board’s MLS® System numbered 2,284 units at the end of July 2010, up 21 per cent from last year’s low. There were 2.6 months of inventory at the end of July, up from levels recorded a year earlier (1.5 months). The number of months of inventory is the number of months it would take to sell current inventories at the current rate of sales activity.
As our business grows, number of clients had asked us to expand our services to further than GTA; As a result of your recognition of our hard work and dedication, we are proud to announce that as of July 1st, we are offering full Real Estate service to entire Niagara Region.
If you were happy with service of your Realtor in GTA and would like to receive the same service in search for home or investment in Niagara region, why go through stress of selecting Realtors that you have no record with ?
Whether you are searching for retirement or investment property, job relocation, or simply looking to find your next home, Team Spanovic already has good track record with successful transactions in Niagara on The lake, Niagara Falls and will be happy to offer team effort in servicing your needs with same dedication as we are in GTA.
Number of clients have asked me about changes that are to happen on July 1st, 2010 and how will they be affected when buying or selling their home; Even the (great)number of Realtors were in the limbo when asked the same question;
Answer was: NOT MUCH, since taxes are included on resale homes. In some ocassions, HST will be applied , and that has been explained in my previous blog. However, something greater has happened back in April, that went ( for 90% of potential buyers ) under the radar. Banks have made the change in the way they will qualify future Buyers and number of deals did not complete just because of it;
If before April 19, you have qualified for purchase of 400,000 home, today, you might qualify for 370,000 , although nothing changed in your income, spending habits, etc..
So, what happened ?
This article might shed some light on important changes that have affected our buying power
Summary of changes:
CHANGE 1: Qualifications Borrowers must qualify for a five-year fixed-rate mortgage, even if they opt for a lower variable rate. Previously buyers had to qualify for the higher of a three-year fixed rate or a variable-rate mortgage.
A buyer of a $337,000 home will require $9,200 more in annual income to qualify. A buyer of a $200,000 home will need to earn $5,400 more.
CHANGE 2: Refinancing Lower the maximum amount a homeowner can withdraw when refinancing a mortgage, to 90 per cent from 95 per cent of the value of the property.
The effect? Limited, although it could dampen the purchase of some large consumer goods bought through mortgage refinancing.
CHANGE 3: Speculation Increase the required down payment to 20 per cent from 5 per cent for insured mortgages obtained for purchasing speculative housing investments not occupied by the owner.
About 5 to 15 per cent of mortgage deals will be affected in a "significant" manner, said Toronto-Dominion Bank, which predicts the rule will "significantly reduce the risk of speculation driving the market forward."
Just as Toronto’s real estate market begins to recover, realtors and home builders are worried Ontario’s new harmonized sales tax could send sales plummeting again.
The number of home sales in the GTA in the first half of May was up 3% over the same period last year, after a series of year-over-year drops, the Toronto Real Estate Board said today. The average price was $399,811, about the same as last May.
“We’re out of the trenches for sure,” said Jason Mercer, senior manager of market analysis for the board.
But the harmonized sales tax looms on the housing horizon. The tax will come into effect in July, 2010, combing the 5% GST and 8% PST into one 13% tax. The HST will apply to new homes and to all home closing costs, creating thousands of dollars more in taxes.
Currently, new homes are exempt from PST. Under the HST, new homes worth less than $400,000 will qualify for a 6% tax rebate, but new homes worth more than $500,000 will be subject to an additional 8% tax.
This would mean an additional $30,000 on a $500,000 home.
The HST will hit new home buyers in Toronto harder because real estate prices are higher here, Ontario Homebuilders Association president Frank Giannone said during a meeting with the National Post editorial board.
“A $500,000 new home in Toronto doesn’t get you much,” said Mr. Giannone, who is also president of the Fram Building Group.
Mr. Giannone said the HST is a good idea, but current plans mean the entire purchase price is taxed once the $400,000 threshold is reached, and that could discourage middle-income earners from buying a new home.
“If you don’t have your own place yet, or you have your own place and you’re planning on moving up, you’ve hit a wall,” Mr. Giannone said.
Only 7% of home buyers will be affected by the new tax, said Alicia Johnston, spokesperson for the Ontario Ministry of Finance.
The HST may only apply to new homes, but closing costs on all homes will be hit with the 15% tax. This will add approximately $2,000 extra in taxes per sale for costs like home inspectors, lawyers and real estate commissions, said Toronto Real Estate Board chief government and media relations officer Von Palmer.
The additional $2,000 could hinder buyers who already struggle to save enough for a down payment, Mr. Palmer said, adding new taxes are not what the industry needs during a recession.
“There is never a good time for a new tax, but this is bad,” Mr. Palmer said.
He suggested the closing costs be exempt from the HST, but the government isn’t considering that option.
“We can’t exempt everything, otherwise it wouldn’t be a harmonized sales tax,” Ms. Johnston said.
Not everyone in the Ontario housing business thinks the HST means gloom and doom for the housing industry in the GTA.
“The HST is one factor that will impact sales next year, but it is only one of many factors,” said Ted Tsiakopoulos, regional economist for the Canadian Mortgage and Housing Corporation.
The Canadian Mortgage and Housing Corporation predicts sales in Ontario will pick up next year by 4.1% for resale homes and 1.9% for home starts.